Should You Hold a Day Trading Position Overnight?

hold a day trade overnight
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You're a day trader (or considering it), buying and selling stocks, currencies or futures throughout the trading session. Typically all your trades are closed before your respective market closes, but you're debating whether to hold a position overnight.

There are multiple factors to consider with an overnight position, and each market (stocks, forex, and futures) have different factors to consider. Primarily, risk and risk management need to be addressed, as well as the capital cost of holding the position, changes in leverage and the strategic reason (if there is one) for holding the position overnight.

Reasons to Hold a Day Trade Overnight

Day traders open and close positions during the trading day, and by definition don't hold trades overnight. Therefore, if holding a trade overnight, consider the reason for doing it. If the reason is not sound, then close the position before the market closes. 

Typically traders want to hold trades overnight either to increase their profit, or they hope a losing trade will be reduced or turn into a profit the following day.

Successful day traders have clearly defined boundaries about when they trade, and when they will take profits and losses. Often these boundaries include the use of stop-loss orders, trailing stops and profit targets. If one of these orders, which closes a trade, is not reached by the end of the trading session the position is manually closed. Holding a trade overnight presents additional risk and introduces new variables which likely weren't taken into consideration when the trade was originally placed. 

As for losing day trades, they should not be held overnight. Take the loss and begin trading fresh the next day. If proper risk management protocols are being used then no single loss is detrimental, so there is no reason to gamble on whether a trade will turn profitable after the market closes/next day.

And holding a day trade after-hours can be a gamble because once the market closes new risks are introduced (risks vary by market, with some presenting more risk than others).

If seeking additional profit on a day trade by holding overnight, this too is a gamble. Conditions change (or trading is unavailable in some markets) after market hours, and while the gain could increase, it could also turn into a loss. Lock in the profit and trade afresh the next day. More profit can be made tomorrow (on new positions), so the hope of making more money isn't typically a good reason for assuming the risk of holding a day trade overnight.

Day traders may also be tempted to hold a day trade if they expect a big move the next day. For example, a company is revealing its earnings overnight which will cause the price to jump or dump the next day.

While there is big profit potential here, there is also a huge risk if the trader ends up on the wrong side of the move. 

There are few good reasons to hold a trade overnight unless absolutely forced into it because of a trading halt or lack of liquidity (and this latter problem is avoided by only trading instruments with ample volume). Only swing trades (trades that last a couple days to a couple months) should be held overnight, and this should be planned before the trade is placed, not once in the trade. 

Factors and Risks When Holding Overnight

Consider these factors for each market when holding a position overnight. 

In the stock market:

  • Leverage requirements change for overnight trading. Most US brokers will provide up to 4:1 leverage on day trades, but only up to 2:1 leverage on overnight positions. This means you have less capital available to you when holding overnight. The reduced leverage means you may not have enough capital to hold the position overnight in the first place.
  • If holding overnight, on leverage, there will be borrowing costs, since you are borrowing money (leverage) from your broker to hold that position. 
  • Most stocks and EFTs have much less liquidity right after the closing bell, and then typically no volume until the next morning before the market opens (pre-market). If you hold past the closing bell you will often be forced to hold the position until the next morning, even if you change your mind, because there is no liquidity. This leaves the trader at the whim of the market as to where it will open the next day. It could begin trading the next day much lower or higher (called a "gap"). It is a significant unknown.
  • The risk of a significant gap is compounded if there is overnight news that will impact the stock — the price difference between the prior day and the next day can be substantial. Even if you place a stop loss order, it may not protect you. The stop loss will fill at the nearest price, which could be significantly worse than the price expected (price on the stop loss).
  • A gap could also work in a trader's favor, creating a much larger gain than expected.

In the forex market:

  • The forex market trades 24-hours a day. Trading is seamless between Sunday night (EST) when currency markets open and the Friday U.S. close. Price gaps are rare during the week but can occur following a weekend (when there is no trading). Price gaps may occur when major economic data is released. It's recommended day traders close all trades which could be impacted by a scheduled high-impact economic data release, whether holding overnight or not. 
  • Leverage does not typically change if holding overnight (could vary by broker), therefore your capital/buying power is not affected.
  • At 5 PM EST your broker will either credit or debit you with interest, based on what currencies you are holding at that time. This is called rollover. Typically this is a tiny amount: a few cents to a few dollars if holding a standard lot, or smaller position. Holding the position after hours (after 5 PM) may result in a tiny rise or fall in your equity balance. 
  • Most currency pairs have much higher volume and more movement when European and US markets are open. Volume and volatility typically drop off when these markets are closed. Day traders are better off trading during the active times, and closing positions before the quiet times (quiet and active times vary by currency pair). That said, there is always a major global market open for business somewhere on the globe, which allows for seamless 24-hour trading. Therefore, holding an overnight position is not a major concern in the forex market.
  • Quiet times in the currency market means less volume, and that can result in very sharp and random movements caused by small groups of traders or large orders. It can be difficult to trade in such conditions unless the trader has a strategy specifically designed for this type of low-volume environment. 

In the futures market:

  • The futures market is a like hybrid of the stock and forex markets. Many futures markets trade 24-hours day, but capital and leverage are affected by holding overnight. 
  • Day trading margin--how much the broker requires a trader to have in their account to day trade a futures contract--is typically significantly less than what is required if holding overnight. Check with your broker for what their Initial margin requirements are. Initial margin is typically five to ten times higher than day trading margin. If you put up $500 to day trade a specific single contract, you may be required to put up more than $5.000 for each contract you hold overnight.
  • Outside of normal trading hours, volume typically declines significantly. The futures contract may still have bids and offers around the clock (during the week, not on weekends), but there are fewer participants which means there is little movement, or the market could make large random movements based on the actions of a small group of traders or a few large orders.
  • While most futures contracts trade 24-hours a day, there may be price gaps if economic data is released or significant news comes out. Price gaps can be substantial when there is little liquidity outside of normal market hours. There may also be small (or possibly large) gaps in price during the Maintenance Period (when the exchange shuts down trading for a period of time at the end of the day). 

Final Word on Holding Day Trading Positions Overnight

Forex is a seamless 24-hour market, with the exception of being credited or debited interest rate differentials at 5 PM EST. Therefore, holding an overnight position in this market isn't a huge deal. Though, volume and volatility are lower (for many pairs) outside of the European and US sessions.

Stocks carry significant risks when holding overnight. Not only is leverage reduced and interest charged on leverage, but the trader is also left exposed to potentially large price gaps which can result in way larger losses (or profits) than expected. 

More capital is required when holding futures positions overnight (compared to day trading). There are maintenance periods following regular market hours which may expose the trader to small price gaps. Futures trade around the clock, but volume is typically much lower outside normal business hours. 

Day trades should be left as day trades. Unless a trade was originally planned to be held overnight, it should be closed during active market hours. This helps avoid the common problem of holding onto a losing trade for longer in the hopes that it will return to profitability or gambling on whether a market will jump or dump overnight.

Whether day trading or holding positions overnight, be aware of high-impact news events which could render a stop loss ineffective. Day traders should close all positions before such events unless their strategy is specifically calibrated and tested to withstand substantial volatility.